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Avaya Reports Third Fiscal Quarter 2005 Results


Avaya Inc. reported income from continuing operations of $194 million or 40 cents per diluted share in the third fiscal quarter of 2005.

Avaya Inc. (NYSE:AV), a leading global provider of business communications applications, systems and services, today reported income from continuing operations of $194 million or 40 cents per diluted share in the third fiscal quarter of 2005. These results include the net favorable impact of $123 million related to the settlement of certain tax matters and other deferred tax adjustments. Excluding these items, earnings per diluted share would have been 14 cents (See table for details.)


In the same quarter last year the company reported income from continuing operations of $58 million or 12 cents per diluted share. Those results reflected the impact of a loss on senior secured notes extinguishment of $21 million. Excluding this item, earnings per diluted share would have been 16 cents. (See table for details.)


Avaya's third fiscal quarter 2005 revenue increased 21.7 percent to $1.236 billion, which includes the benefits of acquisitions, compared to revenue of $1.016 billion in the third fiscal quarter of 2004. On a sequential basis, revenue increased one percent from $1.222 billion in the second fiscal quarter of 2005.


The company's operating income increased to $76 million from $52 million, sequentially, and it generated $126 million in operating cash flow in the quarter. Avaya also retired substantially all its debt in the quarter. Sequentially, product sales rose four percent, services revenues were essentially flat, and rental and managed services were down about $8 million. In the United States, sales rose four percent sequentially, with IP line shipments rising 30 percent. While international revenues fell 3 percent sequentially, on a constant currency basis international revenues were essentially flat.


"We improved our performance during the quarter," said Don Peterson, chairman and CEO, Avaya. "We introduced a new suite of intelligent communications applications. We forged new relationships with Juniper Networks, Nokia and RIM to continue extending the benefits of communications to increasingly mobile and distributed enterprises and we made additional progress with the Tenovis integration. These actions extend our value proposition and make Avaya well-positioned to support our customers around the world."


Year-To-Date Results
Revenues for the first nine months of fiscal 2005 were $3.606 billion compared to $2.993 billion for the first nine months of 2004, an increase of 20 percent. Avaya earned $263 million or 54 cents per diluted share from continuing operations in the first nine months of 2005 compared to income from continuing operations of $191 million or 42 cents per diluted share in the first nine months of 2004.


Outlook For The Year
In the fourth quarter versus the third quarter, assuming economic conditions remain stable, the company expects operating earnings growth based on an acceleration in revenue growth and continued cost and expense management.


Share Repurchase
Avaya said it repurchased 5.6 million shares of its common stock during the third quarter at an average price per share of $8.38, or a total of $47 million.


Acceleration of Certain Stock Options with Exercise Prices in Excess of Current Market Price
Avaya said its board of directors has approved a plan to accelerate the vesting of certain outstanding stock options exercisable for Avaya common stock. Based on this action, all stock options outstanding as of July 26, 2005, having an exercise price greater than or equal to the higher of (i) $13 or (ii) 125 percent of the closing price of a share of company common stock on the New York Stock Exchange on July 26, 2005, will vest and become fully exercisable as of that date. Aside from the acceleration of the vesting date, the terms and conditions of the stock option award agreements governing the underlying stock option grants remain unchanged.


Third Fiscal Quarter Highlights
In May, Avaya announced its Intelligent Communications roadmap and strategy. Based on open, industry standards and web-based technologies, intelligent communications seamlessly connects communications applications and business applications giving workers, customers and processes the ability to be linked to the right person, at the right time, by the right medium - voice, text and video - over any network. This strategy is backed by new and expanded capabilities in the Avaya MultiVantage Communications Applications portfolio, including:

  • A new Converged Communications Server, which includes enhanced SIP services and a new open Web Services-based applications enablement suite, which will simplify and stimulate the design of new business communications applications by software vendors and Avaya customers.

  • A new release of Avaya's IP telephony software, Avaya Communication Manager 3.0, a platform featuring new levels of availability across an entire business to help ensure continuous, reliable and secure operation of mission-critical applications in a global 24/7 environment.

  • New capabilities in the Avaya Customer Interaction Suite, to help increasingly distributed businesses seamlessly link a company's entire workforce - including contact center agents, branch office employees and knowledge experts in any location - to serve customers with greater speed, accuracy and efficiency.


Customer Wins


Wynn Las Vegas Resorts opened its new, 45-story property with an Internet Protocol (IP) telephony solution from Avaya, including 4000 IP screen phones throughout the hotel, guest rooms and its customer service facilities to deliver a variety of services, plus mobility and customer service business communications applications.


Vonage, the fastest-growing consumer telephony provider in North America, implemented a new Avaya IP Telephony Contact Center Solution. Based on Avaya Customer Interaction Suite and powered by Avaya Communication Manager, the SIP-based solution will serve as the core platform for Vonage's global customer care operations as new contact centers open around the world.


CTI Móvil - In one of the largest IP telephony implementations in Argentina, CTI Móvil - a leading mobile phone operator in Argentina, implemented a new, Avaya intelligent communications solution that enables the company to distribute calls to customer service agents in different locations, thereby providing a faster response to customer needs.




Juniper Networks - In a strategic relationship to deliver secure converged communication solutions to enterprise customers worldwide, the new alliance would include joint development, sales and marketing of converged solutions and services combining Avaya's enterprise communications and Juniper's security and routing strengths.


Nokia - Building on a previous announcement made in March, Avaya and Nokia will futher collaborate to provide workers with an easy-to-use interface to access the feature functionality and benefits of Avaya Communication Manager from the screen of their Nokia mobile phones.


Research In Motion (RIM) will work with Avaya to extend Avaya secure enterprise communications applications to the BlackBerry ® platform over wireless local area networks (WLAN) using Session Initiation Protocol (SIP).


Market Leadership
Dell'Oro Group placed Avaya number one in global enterprise telephony revenues, which includes IP and TDM results with 18 percent market share, 3 points ahead of the nearest competitor. (Worldwide Enterprise Telephony Tables 1Q05).


Avaya was named IP telephony market leader in Asia Pacific, with 27.1 percent share of the market (Frost and Sullivan).


Synergy Research Group named Avaya global leader in Enterprise IP Telephony Port Shipments for the 6th consecutive quarter with 21 percent of the worldwide market.


Forward Looking Statements
The projected financial results in this news release in the section entitled "Outlook for the Year" and certain statements made in the earnings conference call are forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements regarding Avaya's expected performance and outlook for operating results are based on current expectations, forecasts and assumptions that involve risks and uncertainties that could cause actual outcomes and results to differ materially. These risks and uncertainties include, but are not limited to:

  • price and product competition;

  • rapid or disruptive technological development;

  • dependence on new product development;

  • the mix of our products and services;

  • customer demand for our products and services, including risks specifically associated with the services business and, in particular, the maintenance and rental and managed services lines of business, primarily due to renegotiations of customer contracts and changes in scope, pricing pressures and cancellations;

  • general industry and market conditions and growth rates and general domestic and international economic conditions including interest rate and currency exchange rate fluctuations;

  • disruption associated with the re-alignment of our sales and marketing efforts;

  • risks related to inventory, including warranty costs, obsolescence charges, excess capacity, material and labor costs, and our distributors decisions regarding their own inventory levels;

  • the economic, political and other risks associated with international sales and operations, including increased exposure to currency fluctuations as a result of our acquisition of Tenovis;

  • the ability to successfully integrate acquired companies, including Tenovis, which has required significant management time and attention;

  • the ability to attract and retain qualified employees;

  • control of costs and expenses;

  • U.S. and non-U.S. government regulation; and

  • the ability to form and implement alliances.


For a further list and description of such risks and uncertainties, see the reports filed by Avaya with the SEC, which are available at, particularly the information contained in Part II, Item 7, entitled "Forward Looking Statements", of our fiscal 2004 Form 10-K and the information contained in Part I, Item 2, entitled "Forward Looking Statements", of our Form 10-Q for the fiscal quarter ended March 31, 2005. Avaya disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.


Presentation of Information in this Press Release
In an effort to provide investors with additional information regarding the company's results as determined by generally accepted accounting principles (GAAP), the company has also disclosed in this press release, and will disclose in its conference call discussing third quarter earnings results, adjusted earnings per share and net cash, non-GAAP financial measures which management believes provides useful information to investors.


The rationale for managements' use of non-GAAP measures is included as part of the Form 8-K furnished to the SEC today. The reconciliation of these non-GAAP measures to the most directly comparable GAAP financial measures is included in this release and as part of the supplementary materials presented with the third quarter earnings materials. The supplementary materials are available on the Avaya investor relations Web site at and will be included in a subsequent filing of a Form 8-K with the SEC.


Conference Call and Webcast
Avaya will host a conference call with a listen-only Q&A session to discuss these results at 5:00 p.m. EDT on Monday, July 25, 2005. To ensure you are on the call from the start, we suggest you access the call 10-15 minutes early by dialing:


Within and outside the United States: 706-634-2454


For those unable to participate, there will be a playback available from 8:00 p.m. EDT July 25, through August 1, 2005. For the replay, if you are calling from within the United States, please dial 800-642-1687. If you are calling from outside the United States, please dial 706-645-9291. The passcode for the replay is 7296349.


WEBCAST Information: Avaya will Webcast this conference call live, with a listen-only Q&A session. To ensure that you are on the Webcast, we suggest that you access our Web site ( 10-15 minutes prior to the start. Slides accompanying the conference call are available at the same location. Following the live Webcast, a replay will be available on our archives at the same Web address.


About Avaya
Avaya Inc. designs, builds and manages communications networks for more than one million businesses worldwide, including over 90 percent of the FORTUNE 500 ®. Focused on businesses large to small, Avaya is a world leader in secure and reliable Internet Protocol telephony systems and communications software applications and services.


Driving the convergence of voice and data communications with business applications - and distinguished by comprehensive worldwide services - Avaya helps customers leverage existing and new networks to achieve superior business results. For more information visit the Avaya Web site:


View the earnings statement.

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